Canadian Apartment Properties Real Estate Investment Trust (CAR-UN) Q2 2026 Earnings Call Transcript

Hello, everyone. Thank you for joining us and welcome to the Canadian Apartment Properties REIT second quarter 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Nicole Dolan, Investor Relations. Nicole, please go ahead.

Thank you, Operator, and good morning, everyone. Before we begin, let me remind everyone that during our conference call this morning, we may include forward-looking statements about expected future events and the financial and operating results of Capri, which are subject to certain risks and uncertainties. We direct your attention to slide two and our other regulatory filings for important information about these statements. I will now turn the call over to Brad Cutsey, President and Chief Executive Officer.

Thanks, Nicole, and good morning, everyone. Joining me today is Stephen Cope, our Chief Financial Officer. Before we begin, I'd like to say that it's been a privilege to be joining you today for my first earnings call as President and Chief Executive Officer of CAFRE. At this time, I'd also like to acknowledge my predecessor, Mark Kenney, for his many years of leadership and the significant contributions he made to CAFREAT. While I'm still in the early stages of my tenure, the past several weeks have given me the opportunity to spend time with our people and our portfolio, and I have already been encouraged by the high quality of the platform and the depth of expertise across the organization. Together they've re-imported my confidence in the solid foundation upon which CAFREAT is built, and I look forward to further building on that foundation in the years ahead. With that, let's turn to slide 4 and walk through some highlights from the year-to-date. From a capital allocation perspective, CAPREIT has completed approximately $66 million of acquisitions and dispositions in Canada, $145 million of property investments in Europe, and the privatization of European residential REIT for $99 million, which provides us with the greater flexibility to manage the sale of the remaining European assets. We've also continued to invest in our NCID program with $71 million deployed so far this Operationally, while market conditions remain pressured across the multifamily sector, CAPRI continued to demonstrate resilience. Physical oxygen for our same property Canadian portfolio was 97.5% on June 30th, which is meaningful above Yardi's latest quarterly average of 95.3% nationally. More recently, Capri's physical occupancy as of July 31st was down slightly to 97.3%, which is consistent with the typical seasonal trend observed between June and June. While maintaining healthy occupancy levels, we have also achieved 2.3% growth in our same property-occupied AMR year-over-year. Combined with effective cost initiatives, our Canadian same property NLI margin remained strong of 64.2% for the six months ended June 30, 2026. Our balance sheet total debt represented 41.2% of real support value as of June 30, 2026, which is up modestly versus the previous year, mainly due to fair value losses recognized on investment properties. Overall, these results reflect the strength of the portfolio and the team in which it continues to be a challenging operating environment. That said, while market conditions remain competitive, we are beginning to see early signs that operating fundamentals may be stabilizing. In line with that, we will have several consecutive months of moderation in our loss to lease on turnovers, which we'll discuss in order to you, Delph, later on in the call. I'd now like to spend a few minutes highlighting our capital allocation for EERD. Turning to Over the past several years, CAFREED has significantly enhanced the quality of its portfolio. Today, approximately 68% of the portfolio consists of core legacy assets, of which 97% are located in rent-controlled markets. This provides stability in the rent growth profile, even in the softer operating environment, given the significant embedded mark-to-market opportunity across these assets. A further 19% of the portfolios comprise recently constructed communities that are expected to benefit from lower capital requirements, greater operating efficiencies, and strong long-term earnings growth potential as market fundamentals normalize. The remaining 13% of the portfolio across Canada and Europe represents the source of continued capital recycling. With this well-remaid discipline and optimistics selectively monetizing low cash yield analysis, where value has been maximized, and redeploying that capital into investments accreted to FFO per unit in the near term. In addition to optimizing the portfolio through ongoing repositioning, we invest in the implementation of a new ERP system in order to enhance our leasing capabilities, improve data-driven decision-making, streamline processes, and support further optimization of our cost structures. More broadly, as I continue to assess the business over the coming quarters, I'll be evaluating the entire portfolio to ensure that every capital allocation decision supports stronger FFO per unit growth, an enhanced long-term cash flow position, and the creation of sustainable value for our units. With those objectives in mind, our NCIB program continues to represent compelling use of capital available to us in the current environment. You can see on slide 7 that since 2022, we've deployed approximately $1 billion to repurchase nearly 24 million trust units at an average price of approximately $43 per unit. And as I mentioned earlier, during 2026, we invested approximately $71 million to buy back trust units at a weighted average price of $36 per unit, which represents a sizable discount to a June 30th diluted NAV of $54 per unit. We believe these accretive repurchases not only create immediate value today, but also positions unit holders to benefit more fully in the value created once rental housing market fundamentals return to balance, and that inflection is ultimately reflected in the tax. Going forward, we'll continue to evaluate the NCIB alongside every other capital allocation alternative, and deploy funds into the program where repurchases are accretive to FFO per unit and to NAV per unit, while remaining leverage neutral. With that, I'll turn the call over to Stephen to walk through our operational and financial results.

Let's start with our operating performance on slide 9. While leasing conditions remain competitive across many parts of the Canadian rental market, our operating teams executed well throughout the quarter, maintaining a disciplined focus on managing occupancy, pricing, and resident retention. As a result, you can see on the slide that for each of our three largest regions, occupancy continues to compare favorably against broader industry benchmarks, supported by our strategic use of incentives given the current environment. In our largest market of Toronto, physical occupancy was 98.4% as of June 30th, notably higher than the Yardi's reported quarterly average of 95.2%. At the same time, we grew occupied AMR in Toronto by 2.1% year-over-year to $1,867. This reflects the strength of our legacy portfolio alongside our ability to effectively balance occupancy and rental growth, even in today's more pressured operating environment. The same underlying themes are evident across a broader portfolio, with rent growth being driven by lease renewals and the substantial embedded mark-to-market opportunity that exists within our legacy portfolio, the vast majority of which is located in rent-controlled markets, as Brad mentioned. However, our turnover remains weighted towards shorter-tenured leases that are above current market rent and continuing to reset toward today's market levels. Turn to slide 10, I'll provide an update on how that turnover dynamic evolved during the second quarter. Approximately 51% of Canadian turnover during the quarter came from residents who had occupied their suites for less than two years. These leases experienced an average decrease in monthly rent of 7.1%, an improvement from a decline of 10.8% in the first quarter. The remaining 49% of turnover came from residents with lease tenures of two years or longer, where we continued to achieve positive rent growth of 5.4%. As a result, our blended change in monthly rent improved to negative 1.2%. This compares to negative 2.1% in the first quarter, reflecting some moderation in the negative rent spreads we're realizing on shorter leases. This trend continued into July, with the overall change in rent on turnover improving further to positive 0.2% for the month. Looking at the chart on the left of the slide, as of June 30th, approximately 31% of residents have lived in their home for less than two years, across which in-place average monthly rent is $2.53 per square foot. Within this segment, approximately 20% of the in-place rents remain more than 5% above our estimated market rent, indicating that there is still some additional normalization to work through. The remaining 69% of our residents have lived in their homes for more than two years. These longer-tenured leases continue to generate positive average rent uplifts on turnover, even in the current operating environment, providing an important source of stability, driving resilient overall rent growth until supply-demand fundamentals return to balance. Alongside that turnover dynamic, we continue to utilize incentives to support occupancy, as you can see on slide 11. This strategy allows us to protect occupied AMR while remaining competitive against comparable offerings from our peers. in the second quarter of 2026 new residential inducements granted were 4.6 million dollars up from 2.6 million dollars a year ago but modestly lower than the 4.8 million dollars recorded in the first quarter while there will be some moderation in the level of new incentives granted throughout the second half of the year we expect them to remain elevated as market conditions continue to warrant a competitive leasing approach. With that, I'll now briefly cover our overall second quarter financial results on slide 12. Same property Canadian operating revenues increased by 0.8% while operating costs grew by 0.7%, driving NOI growth of 0.9% and a stable NOI margin of 66.2 percent diluted ffo per unit was 65.4 cents compared to 66.1 cents in the second quarter of 2025 down 1.1 percent primarily due to the loss noi from dispositions and higher financing costs partially offset by creative impact of trust unit repurchases under our ncib Looking at our year-to-date results on slide 13, same property Canadian operating revenues increased by 1%. With operating costs flat, our same property Canadian NOI margin was up by 0.3% to 64.2% for the six months ended June 30, 2026. Diluted SFO per unit was $1.24.9 for the first six months of the year with FFO payout ratio of 62%. Finally, slide 14 summarizes our liquidity position and laddered mortgage maturity profile. As of June 30th, our mortgages had a weighted average interest rate of 3.4% and a weighted average term to maturity of 4.2 years. We also had $180 million of immediate available liquidity on our acquisition and operating facility. Moving ahead, we'll remain committed to reinforcing our prudent leverage profile while supporting stronger per-unit earnings growth. With that, I'll turn the call back over to Brad to wrap up on slide 15.

Thanks, Stephen. Before we open the line for questions, I'd like to close on a few thoughts. While the near-term operating environment remains competitive, it's important to distinguish between today's market conditions and the long-term outlook for the business. The underlying fundamentals supporting Canadian rental housing remain robust, and CAPREIT is well-positioned to benefit as those fundamentals reassert themselves over time. In the meantime, our focus is on discipline execution in the areas we can control. That means continuing to direct capital towards its highest and best use on a risk-adjusted basis. Whether that's investing through our NCIB program, strengthening sustainable capital generation or further reinforcing the balance sheet importantly every capital allocation decision will be guided by the goal of driving stronger per unit growth than the ffo as i've said throughout today's call i continue to use it in the coming months to deepen my understanding of the platform but one thing has already become clear to me capri has an exceptional team and a high quality portfolio i look forward to working alongside our residents team members leadership team and Board of Trustees to deliver on the opportunities ahead and enhance earnings for unit holders. On a final note, I'd like to remind everyone that we have rescheduled our Investor Day in Montreal to November 19th, as communicated earlier this week. This additional time will allow us to deliver a more comprehensive program and provide a meaningful opportunity to discuss Caffrey's strategy and portfolio in more detail. We appreciate your understanding and hope to see there. With that operator, we'll be pleased to take your question.

We will now begin the question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device please stand by while we compile the q a roster your first question comes from the line of jonathan kelcher with td cowan your line is open please go ahead thanks uh good morning um first off um i guess the the capital allocation focus looks like it's going to be mostly on the NCIB.

I guess first, how comfortable are you with where leverage is right now? Would you take it up a little bit to buy back shares?

I think we're comfortable with where the leverage is right now, Jonathan. Over time, we'd like to maybe turn that a little lower. But as far as NCIB goes, we're committed to the NCIB, but on a leverage-neutral basis.

And then I guess that means it would be selling assets to kind of fund that. And if you look at the three buckets that you have, would asset sales, is it going to be strictly a non-core bucket or would you consider some of the either recent construction or core assets?

No, I think it would be the non-core and we'll continue to evaluate our disposition optimistically. driven by whether we believe value has been maximized on the asset.

Okay. That's helpful. And then lastly, Stephen, you talked about the inducements that maybe trend down over the back half of this year. I guess two things there. What are some of the inducements that you're offering? And if we look at a level, we should be thinking sort of 1% to 1.5%. be a good level for inducements?

Yeah, so incentive use has trended up over the past quarters, like more pronounced on the recent build than legacy. We are offering in certain locations, again, it's all dependent on competition within that building and its area, but usually it's about one month's rent. And again, it's very targeted buildings. There are some situations where we do offer two months, but a lot of it is just one month. And we try to first do non-cost-bearing incentives first before we go into actually giving actual incentives. So, you know, while we knew residential incentives granted had declined slightly from Q1, we do expect them to remain elevated at levels, albeit, like I did say, like, you know, moderating lower to the latter part, I mean, the last half of the year. We are constructive on the Ontario, particularly the GTA, which is our largest market, and we're hopeful we can actually, you know, we do have good visibility around incentives, and we have seen, you know, moderation in July and August so far.

Okay, that's it for me. I'll turn it back.

Your next question comes from the line of Jimmy Shan with RBC Capital Markets. Your line is open. Please go ahead.

Thanks. So my first question to Brad. I know you're still in assessment mode, but I was curious as to where are you seeing sort of the biggest opportunities to create, you know, per unit value? What are the low hanging fruits? Any color you can share from your initial assessment so far?

Yeah. Good morning, Jimmy. It's still early days for me. but some of my initial observations point to opportunities probably in our leasing processes and streamline some of our other operating processes. The other thing I'd maybe mention on this is also we're in the middle of our multi-year ERP implementation, which I think is going to give us a much better platform to standardize and automate things like leasing in some of those other processes that we can improve on.

Okay. And then John referred to NCIB as your priority from a capital allocation perspective. I don't know if you've confirmed that. Is that really where you see the biggest bang for the buck today?

I think we'll continue to – yeah, I think every dollar of capital will be allocated to the highest and best use on a risk-adjusted basis, Jimmy.

And where do you see that today? Yeah.

Well, it obviously depends, but if we're sitting on cash and we can do it on a leverage neutral basis, I think our units represent a compelling investment at today's level.

Okay. And then last, just on the turnover rank growth, The sort of improvement you've seen from Q1 to Q2, I think minus 10 to minus 7%, is that to do with market rent improving? Is that a tenant mix?

I'm trying to understand, you know, like had those same tenants turn in Q1 and Q2, would that spread be the same? like are we actually seeing some improvement in fundamental well i i i think there is um just in terms of like you know as the tenants have stayed there for the past two years and market rents have i would say generally we have seen some stabilization market rents that you will see when the late lease comes over when it turns over that that number will be just naturally lower so we have seen that even in when i look at the july numbers uh the under two years you know we talk about um it came down to about uh like you know we saw the the the q2 number being like 7.1 negative and then july it's it's improved as well it's about 5.2 negative so i think that's a a function of, you know, the market rent have become more stabilized. And then I think it's more of that than anything else.

Okay, thank you.

Thanks, Jimmy.

Your next question comes from the line of Matt Kornack with National Bank of Canada Capital Markets. Your line is open. Please go ahead.

Good morning, Matt.

Hey, guys. Morning. Maybe starting with occupancy, because there was a bit of a sequential increase, can you give us a sense? Is that seasonal demand? How has it continued into kind of Q3? And obviously, I think we need to see occupancy before we see rent growth. But what is the trend there in terms of demand relative to your portfolio?

Yeah, I mean, Matt, I kind of mentioned on the call, we did use incentives strategically to increase occupancy. It was seasonality where the occupancy did increase, and we did show our July numbers have occupancy have come down slightly, but that's more of a seasonal change between June and July. But overall, I would say at these levels, we're very comfortable with them.

And on the incentive side – oops, sorry, go ahead.

No, I was just going to say, too, we saw a good leasing activity in Q2. Our conversion was a little down, which shows you how competitive the market is. But there is leasing activity. And depending on which markets, specifically the GTA, we're getting quite constructive on that, Matt. So, as we kind of move through July and August, I'd say we're going to be in a better spot. But if I had to look at the top three markets, I would say the GTA were quite constructive. I think Montreal is a little bit mixed. There's a little bit of new starts in rentals there, and it's more of an issue on the demand side. And I think Vancouver is still trying to work through the absorption of the supply that's been delivered. and it still remains about 4% under construction. So until demand really comes back, the net absorption is probably going to be pushed out in Vancouver, maybe closer to late 2027, early 2028, where we're hopeful of the GDA. We think we might be approaching a more balanced market in the quarters ahead.

Interesting, and it makes sense. Maybe, Stephen, as well, So, are the turnover spreads that you provide, is that net of incentives? Because I know you had mentioned that incentives have ticked up a bit. Are those kind of the face rates? No, they're not. They're gross. And is that why, I mean, one other trend I was trying to figure out, just because Brad, you wouldn't have the benefit of this, but you probably looked at it. But just going back, the move has actually been bigger in the greater than two-year leases in terms of that spread would have been plus 30% in Q4, 24, and it's down to five, although it does seem to be stabilizing at five, whereas there's been less of a move in the less than two-year. is that i mean i'm just that that's a little confounding to me is like in terms of you those longer duration leases is it that you're not renovating those suites when you're putting them back on the market or how should we think of that dynamic you know like so there there are like

um you know there are some leases um that are now you know in the negative territory that are aging into the two to three year mark and and has have and you know as market rents have softened some of that segment is being exposed to the rent reset as well um so we have done more um you know back to backs and i think that's what we're seeing as well fair enough um that's it for me thank you thanks matt your next question comes from the line of kyle stanley with day should ends

your line is open please go ahead morning kyle thanks good morning guys um hey just maybe looking at uh kind of leasing demand i'm wondering are you seeing any any differences or changes in demand across the kind of two buckets in your portfolio your kind of legacy assets versus your more recent construction i'm just wondering if you know you're seeing beginning to see a bit more strength in some of the more recently delivered product or if that other change much yeah it's a great question Kyle I think there's definitely more stabilization stability in the legacy assets which and the rent controlled markets we have seen being a little more competitive in the new

bills that said we we strongly believe when the market does the fundamentals do tighten and and depending on which market we're talking about uh so some of it's more constructed sooner than later but we we still feel quite good about the potential of those new builds it's just got to work through some of the absorbed absorption but really that absorption is really going to be dependent on demand um just kind of sticking with uh leasing spread so with kind of turnover and renewals in mind where do you see the blended spreads trending through the

balance of the year obviously you've provided some kind of guidance into July that the turnover spreads improved a bit but just trying to think about how the blended spread trends through the balance of the year and you know maybe into the beginning of 27th yeah I mean for us we think it's probably going to be modest I mean I think what you see what we provide in July is a probably a good indication of what q3 is but we're hopeful uh we're hopeful that we see some stabilization in certain markets as brad has already indicated uh but i don't i don't want to jump the gun on that too early right now okay noted um just on the kind of operating cost efficiency that you

highlighted obviously the um you know the kind of other opex line was down one one and a half percent year over year this quarter just wondering if you can talk through what some of those operating efficiencies actually were that that drove that and then you know do you expect to be able to maintain a similar level of kind of year-over-year opex inflation through the balance of the year uh obviously taking in mind the the kind of seasonal fluctuations that you expect into the winter months yeah so i mean like you've seen some improvements in our other opex line i mean it's it's you know we've talked about in prior calls it's really just getting very good at tendering uh inviting new vendors and just having a very good uh tendering process where bids are

blind and just get having that competitive um uh competition with your vendors so all that is just translating to better you know our like i would say flat to slightly declining rnm costs within that line and i think i think we can probably see that going for the balance of the year okay thank you for that i will turn it back your next question comes from the line of brad sturges with raymond james your line is open please go ahead good morning brad morning um just sticking to uh the slide 10 um on the leasing spreads just curious the obviously

you know you've highlighted for a few quarters here the the amount of uh turn i guess in the newer short duration leases. Is there any green shoes where the turnover in that segment is starting to moderate a bit or is it simply the improvement of leasing spreads more of a function just on the market rent growth as you suggested?

Yeah, I mean, I think we've said this in terms of we have seen moderation in terms of market rents and as we, you know, go through that cohort of leases that are still negative. It will take us time. I think it will probably take us about 18 to 20 months, but I do think that, you know, the one-year leases are now just very close to market.

And as we get through that, you know, the legacy portfolio, that large embedded market on the two-plus years, you're going to really see that come through as we kind of go, you know, work through that the rest of that 20 because a 20 percent of those rents that are still above market the other thing I would like to add to Steven's point is it also dependent on where market events are headed obviously and not all markets are treated equally and like we've said we're quite constructive like on the Toronto Ottawa Edmonton Victoria America where we're There's a lot of supply that's been delivered in Calgary, we'll see how the infrastructure continues to drive inter-migration there, then I think Calgary's really set up quite And while Halifax has performed quite strong as a market and will likely continue with all the defense spending to be had in Halifax, there is a lot of supply being delivered. there, Kyle. So you got to kind of balance that with, okay, these are today's estimate of the mark-to-market, but our biggest market we're getting quite constructive on. So market could be moving.

Okay. So that's quite helpful. And as you're going through your assessment process and your streamlining some processes, I think you touched on like the operating expense side, just how should we think about from a G&A perspective on the back half of the year, like what would you guide for now on G&A as a run rate?

Yeah, I mean, just in terms of G&A, you can see in our MD&A, I think we're running about excluding all the severance costs and whatnot, about 4%. I think it's going to be in and around that range. And we're comfortable with that for the balance of the year.

Perfect. and brad i apologize i think i called you kyle i don't know how i got that name uh mixed up i apologize i'll give you a pass this time thanks i appreciate it thank you it won't happen again your next question comes from the line of mario sarik with scotiabank your line is open please go ahead good morning thank you good morning um so just just coming back to the revenue side of the equation i think uh three months ago uh we're looking at potentially kind of 2016 to revenue in

the one to two percent range q2 is a bit lighter than that do you have enough you know an updated forecast or updated thoughts in terms of where that may end in the back half of the year yeah i I think we're probably going to see, in terms of revenue, relatively flat as compared to the first six months of the year, as you see in the MD&A.

For the full year, also, you're thinking that it could be kind of flattish?

I mean, I think it's about 1%, yeah.

And then the commentary on the Toronto market is starting to look pretty interesting. You know, you're overweight in the Toronto market, obviously. When do you think new lease spreads can approach inflationary? Do you need to wait until the spring to take longer than that?

Yeah, I think it's definitely sometime in 2027.

If the last couple of months and what we're seeing today continues to hold, Mario, I'm hopeful that this is a first half 2027 event and then just maybe shifting to capital allocation you're tying the ncib activated dispositions in the past cap has put out kind of target and a lot of the heavy lifting has been done is that something you're considering doing today or if not today later on once you've had a chance to go through the entire portfolio just trying to get a sense of any visibility on the potential disposition side, which may impact the volume of the share buyback?

Yeah, no. Short answer is no, Meryl. We'll continue to evaluate dispositions optimistically. So it will only be driven by whether we believe value has been maximized on that.

And then just maybe the last one for you, Brad, looking at kind of the key priorities that were highlighted in the report to unit holders they they look are there any kind of notable expected shifts in strategy on your end or points of emphasis you'd like to highlight now let me caveat uh with the points that i'm still pretty uh early on that have been lifting with

the reposition of the portfolio kind of enhancing um i do think as i mentioned earlier there could be some low-hanging fruit and specifically when it comes to things like your next question comes

from the line of Dean Wilkinson with CIBC. Your line is open. Please go ahead.

Morning, Dean. Thank you. Morning, Brad. Welcome back.

Thank you. Happy to be back.

You and Kyle. Just go back to your prior life and obviously different circumstances, but you sort of had a proclivity to let the vacancy build a little in a view of sort of capturing a higher growth rate going forward. Are you looking at that differently now, or is maintaining the occupancy more a function of having some newer assets? Or just what are your thoughts around that, and how's your approach to that changed?

Yeah, I think if you're asking if this is Internet 2.0, the answer is no. And I think we'll have more to kind of disclose as far as to go forward on the strategy and how we're going to approach things i think we're really excited to host you in montreal in november and i think we can get into more details uh okay well we look we look forward to uh november um thanks guys great thanks we have reached the end of the q a session i will now turn the call back to brad cutsey for closing remarks great thank you i'd like to thank everybody for for your time today and if you have any further questions, please do not hesitate to contact us at any time. Thank you again and have a great day.

This concludes today's call. Thank you for attending. You may now disconnect.